The Adjustment Process of the Money Multiplier and the Loanable Funds Model
This section will show how the retail banks can create (or destroy) loans and liabilities in the form of money credit, depending on lending opportunities and interest rates in the prevailing winds of uncertainty and perceived credit risk. This is the main ingredient of the money supply, which retail banks create by using available reserves in the form of using internal profits from interest payments, the selling of financial assets and securities, buying reserves from other banks as well as using reserves held at the Central Bank or borrowing from it. This generates profit in the form of interest payments from the geometric process of credit growth and represents a cumulative (or diminishing) process based on monetary circuitism. This leads to the formation of the new loanable funds model when the demand is married with the supply, so that the equilibrium rate of interest on borrowing can be determined.